This post is part of a blogging series by economics students at the Presidio Graduate School’s MBA program. You can follow along here.

By Joey Christiano

Property Assessed Clean Energy (PACE) financing is a mechanism that allows renewable energy, water conservation, and energy efficiency projects to be financed at reasonable rates. PACE works by attaching a senior lien to the property, not the installed equipment. The lien is usually repaid over the life of the installed equipment, anywhere from 5 – 20 years. Using a senior property lien has many benefits:

The senior position of the lien allows lenders to offer low interest rates because the property is collateral, not the installed equipment.

Adoption of energy efficiency upgrades and renewable energy installations have been hampered by high up-front costs. Using PACE financing spreads the cost over the useful life of the equipment, which typically generates savings that exceed cost on an annual basis.

The lien is attached to the property, not the person. Making it easy to invest in energy efficiency or renewable energy projects even if the owner plans on selling the property.

PACE sounds great – why isn’t everyone doing it? Residential PACE financing froze up on July 6, 2010 when the Federal Housing Finance Authority (FHFA), released guidance advising Fannie May and Freddie Mac not to work with loans that took advantage of PACE financing because of the risk associated with senior property liens. Several groups, including the State of California, are fighting to reverse the ruling. These groups are fighting for residential PACE financing because they see it as a catalyst to reducing dependence on fossil fuels, promoting renewable energy investments, and creating green jobs.

Commercial markets were not affected While residential PACE is at a standstill, commercial PACE was not affected by the FHFA statement because the majority of commercial real estate mortgages are not owned by Fannie May or Freddie Mac. Commercial PACE has been developing slowly over the past year due to concern that a statement from a governing body could freeze commercial PACE, but since nearly a year has passed since the FHFA statement, commercial PACE markets are starting to pick up.

A report co-authored by the Clinton Climate Initiative states that several commercial PACE programs are in development, in markets such as San Francisco, Los Angeles, Ann Arbor, MI, and Washington D.C. Some programs are expected to launch as early as the second quarter of 2011.

In June 2010, prior to the FHFA ruling, Pike Research estimated that the commercial PACE market could reach $2.5 billion by 2015. That estimate seems a little high, given that as of March 23, 2011 only $9.69M had been approved for commercial PACE funding according to the Clinton Climate Initiative co-authored report referenced above.

Given the nearly $10M currently approved, and the potential to reach $2.5B according to Pike’s estimates, and with markets in large metropolitan areas coming online this year, there could be huge potential for growth. If commercial PACE takes off construction jobs will increase, banks will do more business, and commercial property owners stand to save money by reducing utility expenses.

Clean Fund: an up and coming firm hoping to capitalize on owner arranged financing, a mechanism that will likely be used in several developing commercial PACE markets

With additional firms vying for entry, and an unproven marketplace, only time will tell which firms succeed, and whether commercial PACE will be an effective tool to promote the installation of renewable energy, water conservation, and energy efficiency devices.

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